The Gilmo Report

August 1, 2012

August 1, 2012

Despite pushing for the highs of the rally that began in early June, the NASDAQ Composite Index, shown below on a daily chart, continues to act sloppily, and the sloppiness is even more obvious in individual stocks. The Fed didn’t give the market the QE3 “hit” that it craved today, so the indexes responded by reversing course. This occurs as the NASDAQ’s previous uptrend channel has now morphed into a minor downtrend channel. From the looks of it, a test of the 200-day moving average and the lows of this little downtrend channel may be in the cards for the NASDAQ given that a number of big-stock names in that index have acted poorly over the past three days. Of course, this is all in keeping with the Zig-Zag Summer that we’ve seen so far. My main issue with the market here is that testing last week’s follow-through by taking a few small positions has proven, to me at least, that the market has very little upside traction. Perhaps the only thing that can save it Thursday morning will be some sort of money-printing announcement from the European Central Bank, and even that might turn out to create little more than a shortable rally.

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On a relative basis, the S&P 500 Index has acted better than the NASDAQ Composite by making a higher high last week in this rally that has taken place since the early June lows. In late June and early July the NASDAQ was moving faster than the S&P 500, but it has since slowed over the course of the month, finding resistance at its prior July peaks, while the S&P 500 has been able to move to higher highs. With the NASDAQ weakening here, and the underlying leadership deteriorating, the S&P 500 may also test the lower end of this current ascending wedge formation it has formed since the early June lows, as we see on its daily chart below. Volume picked up on the NYSE today, but some of that was attributed to electronic trading system glitches in 150 NYSE stocks earlier in the day. In any case, the action on Monday was a low-volume move to higher highs that indicated a lack of buying demand. Then on Tuesday, volume picked up as the index reversed. Today’s action is a much sharper reversal on heavier volume, and given the behavior of leading stocks, many of which sold off on heavier volume today, the action has to be taken at face value.

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What also speaks to the incoherency and internal weakness of this market is that out of the four long positions I decided to take on Friday of last week, only Apple (AAPL) produced anything even close to a decent move. It rallied about 5% above its 50-day moving average before finding resistance today on a breakout attempt through the peak of the handle in its cup-with-handle base formation, and that was on a bottom-fishing trick! As I indicated over the weekend, having been short the AAPL as of last Thursday morning I was not getting the sense that sellers were all that interested in unloading the stock. And we can see on the daily chart below that AAPL didn’t see much in the way of follow-up selling to Wednesday’s big-volume gap-down. This set up the push back above the 50-day moving average which almost reached the 619.87 high of the handle in the cup-with-handle formation today before reversing. In any case, this was only good for a 3-4 day trade, as I see it, and the action of AAPL from here must simply be monitored for a possible breakout through the 619.87 peak in the handle. Until then, I am out of the stock.

Apple (<a href=AAPL) Gilmo Report Stock Chart" title="Apple (AAPL) \" />

While AAPL was a bottom-fishing trick that produced a small, short-term profit on a quick trade, the other stocks purchased last week went nowhere. Amazon.com (AMZN), not shown, couldn’t do more than rally sharply for one day before running out of gas and pulling back down into the low 230’s, while Priceline.com (PCLN), bought on the basis of last Friday’s pocket pivot move up through the 50-day moving average, fizzled miserably. Today, it busted through the 50-day line on the downside with volume coming in above average, as we see on the daily chart below. Thus PCLN was summarily punted, and generally if I see stocks act as strongly as AMZN and PCLN did last Friday then I want to see them sustain such strength for more than one day. The fact that neither could follow up on their strong action of last week with any similar movement this week was a sign to pull the plug on these turkeys, and today’s action in PCLN was most certainly a final reason to shoot the turkey.

Priceline.com (<a href=PCLN) Gilmo Report Stock Chart" title="Priceline.com (PCLN) \" />

Another stock that exhibited a pocket pivot type of move on Friday was LinkedIn (LNKD) as we see on its daily chart below. LNKD followed up with a nice move to about 106 on Monday, but this move came on weak volume and the stock reversed by the close, a sign of weakness. And since I was operating on the basis, as I discussed at the end of my report of this past weekend, July 29th, that any long positions taken as a result of last week’s twin follow-through days would be kept on a short leash, LNKD was dumped as well. I have since reversed the long position in LKND and am now short the stock on the break of the 50-day line going into earnings tomorrow after the close. Depending on how the stock acts going into the close tomorrow, I may elect to hold a 10% short position in LNKD for the earnings announcement given that I got a nice 7% downside break in the stock today. If the stock moves lower and enhances my profit cushion then it will be easier to sit with a small position going into earnings. Wish me luck!

LinkedIn (<a href=LNKD) Gilmo Report Stock Chart" title="LinkedIn (LNKD) \" />

Other long ideas I discussed over the weekend are off the table for now, and the action in the likes of Edwards Lifesciences (EW), not shown here on a chart, which could not hold the recent breakout that I discussed in my report over the weekend (July 29th), confirms this. Thus the long side is certainly off the table here, but there are some short ideas that I think are worth looking at. For example, Tibco Software (TIBX) flashed what I suppose one might call a “reverse” pocket pivot move to the downside today as it broke below its 200-day and 50-day moving averages on heavy volume, as we see in its daily chart below. TIBX had already closed below the 200-day line yesterday, but today’s action confirmed the breach in decisive fashion, as I see it. The 200-day line also serves as a very convenient upside guide for a stop at around 28.18, and I would certainly be interested in shorting any bounce up into the 50-day line at 27.58, although that is a mere 51 cents from today’s close at 27.09 such that I would still consider the stock to be potentially actionable as a short right here at 27.09.

Tibco Software (TIBX) Gilmo Report Stock Chart

 

TripAdvisor (TRIP) was once a hot IPO after it was spun off from Expedia (EXPE) and came public last December, but its life cycle appears to have been cut short by a massive-volume gap-down move last week after it announced earnings. As we can see on the daily chart of TRIP, below, the stock did find a little bit of support in the mid-30’s, an area in which the stock formed a little flag formation back in April, so this temporary bounce looks logical. However, I don’t think the support will last very long, and so I tend to view this as a shortable gap-down move with the idea of using the intra-day peak of the gap-down day plus another 2-3% to come up with a stop at around 38.10, as I’ve highlighted on the chart. To me, big-volume gap-down moves are not a lot different from big-volume buyable gap-up moves, and it is possible to treat them similarly such that instead of using the intra-day low of a gap-up day as a selling guide for a buyable gap-up, one can use the intra-day high of the gap-down day as a short-covering guide if one chooses to short a move like this. The best feature of this type of set-up is that the stop keeps the position on a very tight leash, and in this chameleon-like market that is a big advantage.

TripAdvisor (TRIP) Gilmo Report Stock Chart

We won’t know until tomorrow whether the Chief Eurocrat Mario Draghi and the European Central Bank will wow us all with some sort of Euro-style “shock and awe,” but my guess is that if the ECB doesn’t do at least something to put some teeth in Draghi’s bold words from last week then it won’t do much to help the markets. It may also not do much to help the markets even if they in fact do something, but we’ll let the market decide that for itself. My sense here is that while we again saw a momentary flash of strength in the market last week, and one that I did feel could be acted on in measured fashion, it just doesn’t have enough steam to sustain a rally here, so the long side has died a quick death as far as I’m concerned.

It may very well be that the next “zag” to the “Zig-Zag Summer” will be to the downside from here. The market does not seem to be characterized by any type of methodical, steady accumulation of stocks as much as it does by some sort ping-ponging “Algo Wars,” complete with a Darth Vader-like figure emerging from a “dark pool” of unseen institutional liquidity and squadrons of High Frequency Trading droids whizzing around at high speed. And that, for me, is a problem. Does QE3, or at least the threat of QE3 keep a bid under this market, even if it is coming from squadrons of High-Frequency Trading droids? Who knows, but if we decide to take some short positions here as I’ve outlined in this report and they work, then that’s all we will need to know, and keeping tight stops is key to keeping risk under control on the short side just as much as it is on the long side. Otherwise it may turn out that the best place to be in this crazy market is in cash, particularly if the market remains a Zig-Zag market. Stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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